The Arizona Supreme Court rules that a homebuilder cannot contract its way out of its obligations under the implied warranty doctrine.
By Kent Lang
If you are involved in residential construction, you are aware of the doctrine of implied warranty of workmanship and habitability.
That consumer-friendly doctrine has been applied to Arizona residential construction since at least 1979, when the Arizona Court of Appeals held that, in new home construction, the “builder-vendor impliedly warrants that the construction was done in a workmanlike manner and that the structure is habitable.” See: “Court Reaffirms Contract Requirement in Implied Warranty Breach,” by Mike Thal, March 2015
Despite the courts’ repeated reaffirmation of that doctrine, at least one homebuilder tried to use its sales contract to escape its implied warranty obligations. That strategy was shot down in September 2022, when the Arizona Supreme Court, in Zambrano v. M & RC II LLC, sent back for trial a homebuyer’s lawsuit that the Court ruled had been dismissed in error.
Background. In 2013, Tina Zambrano entered into a purchase contract for a home to be built by Scott Homes. The pre-printed contract provided that Scott Homes would give Ms. Zambrano a “Home Builder’s Limited Warranty” that would be “the only warranty applicable to the purchase of the Property.” The contract went on to state that:
All other express or implied warranties of merchantability … habitability and workmanship are hereby disclaimed by seller and its affiliates and waived by buyer, [and] any implied warranty that may exist despite the above disclaimer is hereby limited to a one-year period.
Scott Homes built the home and, as agreed, at close of escrow gave Ms. Zambrano a 40-page warranty administered by Professional Warranty Services Corporation (PWC).
Like the purchase agreement, the PWC warranty disclaimed all implied warranties. Further, it did not generally warrant the workmanship and habitability of the home.
Instead, it arranged construction elements into coverage groups; warranted each group against damages from variances in materials or workmanship from defined standards of performance; and established responsibilities for the builder and the homebuyer.
During the first few years in her new home, Ms. Zambrano encountered a number of workmanship issues, including improper grading and soil movement mitigation, separation of windows from cracking stucco, separation of baseboards from the tile and walls, and nail pops in the ceiling.
She looked first to the PWC warranty, but it was of no help; for each of her claims, either the warranty period had expired or the claim was outside the warranty’s stated coverage. She then turned to Scott Homes, which invoked the purchase contract’s provision disclaiming any implied warranties.
In 2017, Ms. Zambrano sued Scott Homes for breach of the implied warranty of workmanship and habitability.
Scott Homes asked the trial court to dismiss the lawsuit, citing the purchase agreement’s waiver of the implied warranty. The trial court agreed and dismissed the suit.
Rulings on Appeal. Ms. Zambrano successfully appealed the ruling to the Arizona Court of Appeals, which found that “the public policy supporting the implied warranty clearly outweighs the freedom-of-contract interest in the waiver’s enforcement.”
Scott Homes asked the Arizona Supreme Court to review the Court of Appeals’ decision. The Supreme Court accepted the review, noting that “whether and to what extent the implied warranty of workmanship and habitability can be disclaimed and waived or replaced by an express warranty is a recurring issue of statewide importance.”
In September 2022, the Supreme Court sided with the Court of Appeals, reinstated Ms. Zambrano’s lawsuit, and sent it back to Maricopa County Superior Court for trial.
As the Supreme Court noted in its ruling, the case involved “a clash of two public policies recognized by the common law” – first, the freedom to enter into a contract, and, second, that Arizona “implies a warranty of workmanship and habitability in every contract … between a builder-vendor and a homebuyer.
“The issue here is whether a builder-vendor and a homebuyer may agree to disclaim and waive the implied warranty if they replace it with an express warranty. We hold public policy prohibits enforcement of the disclaimer and waiver.”
In its decision, the Supreme Court noted the following:
The freedom to contract “has long been considered a ‘paramount public policy’ [and] courts will not refuse to enforce a contract merely because one party made a bad deal, even when the terms are harsh.”
However, “the circumstances here present the rare case where public policy clearly outweighs enforcing a contract term.”
Specific to residential purchase contracts, “We impute the implied warranty of workmanship and habitability into all contracts between builder-vendors and homebuyers as a matter of common law.”
“The warranty is limited to latent defects that are undiscoverable by a reasonable pre-purchase inspection and serves to protect innocent purchasers and hold builders accountable for their work.”
Other remedies available to homebuyers – such Purchaser Dwelling Act protections and the ROC residential contractors’ recovery fund – are not substitutes for the implied warranty.
Takeaways for Residential Contractors. First, a residential contractor cannot contract its way out of its obligations under the implied warranty doctrine.
Also, a contractor is free to offer an express warranty, as Scott Homes did with its PWC warranty, but it can do so only as an add-on to, and not a replacement for, the implied warranty.
Finally, the Supreme Court’s commentary in Zambrano affirms that, while a person of any age and degree of sophistication is generally responsible to abide by the terms of contracts they sign, Arizona law and courts clearly recognize the unlevel playing field that exists between buyer and seller in a complex commercial transaction. The statutory and judicial protections that exist in Arizona are substantial, and residential contractors are cautioned not to play fast and loose with contract provisions that are intended to skirt well-established public policy.
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